NPC PRESS BRIEFING ON CHINA'S ECONOMY BY PBOC,

UNCLAS SECTION 01 OF 04 BEIJING 000589 SENSITIVE SIPDIS STATE FOR E, EAP, EAP/CM TREASURY FOR OASIA/DOHNER/WINSHIP NSC FOR LOI E.O. 12958: N/A TAGS: ECON EFIN PGOV PREL CH HK TW SUBJECT: NPC PRESS BRIEFING ON CHINA'S ECONOMY BY PBOC, NDRC, MOF HEADS REF: A. BEIJING 0580 ¶B. BEIJING 0559 ¶C. BEIJING 0531 ¶1. (SBU) Summary. At a March 6 press conference held in conjunction with the ongoing National People's Congress annual meeting (refs),People's Bank of China (PBOC) Governor Zhou Xiaochuan, Minister of Finance (MOF) Xie Xuren, and National Development and Reform Commission (NDRC) Chairman Zhang Ping addressed the following issues: -- Macro-economy: The primary objective is to ensure steady and relatively fast GDP growth by boosting domestic demand, reinvigorating industries, and improving social welfare. Some economic indicators are beginning to show signs of recovery. -- Budget: 2009 central government spending on health, education, social security, housing, and other social welfare categories will increase 29 percent to RMB 728.5 billion (USD 106 billion). -- Fiscal Policy: Increased government spending, tax reform, and other initiatives, together with falling revenue, will produce a 2009 fiscal deficit of RMB 950 billion (three percent of GDP). -- Fiscal Stimulus: The RMB four trillion (USD 585 billion) fiscal stimulus, funded by the central government (RMB 1.18 trillion) as well as local governments and non-government sources, will focus on improving people's livelihood. Inspection agencies will monitor project implementation closely to avoid duplication, inefficiency, and waste. It is too soon to tell if more stimulus will be needed. -- Monetary Policy: The State Council at an early point determined that China's policy responses to the global financial crisis should be front-loaded and forceful. Money supply targets are guidelines rather than strict limits. -- SMEs: Lending to small and medium-sized enterprises has increased, but many continue to have difficulty obtaining credit. -- Exchange Rate: The government's goal is to maintain a stable and balanced equilibrium, and "no further explanation is necessary." -- Hong Kong: The RMB settlement pilot project is proceeding, and the currency swap plan was announced to boost confidence on both sides of the border. -- Taiwan: Both sides of the Strait would benefit from greater opening in the banking sectors. End Summary. �A;¶2. (SBU) The March 6 tripartite press conference, with a theme of "meeting the global financial crisis, maintaining steady and relatively rapid economic growth," was one of a number of such events offered to the media and diplomats during the March 5-13 NPC session. Of the twelve journalists chosen to raise questions, about half represented Hong Kong, Taiwan, or foreign media organizations. Unlike the March 4 NPC preview briefing (ref b),however, some if not most of the questions appeared not to be planted, as the ministers sometimes replied without reference to their briefing materials and appeared nervous at times. Macro-economy: Has China Hit Bottom? -------------- ¶3. (U) In response to a question from an "Economic Daily" reporter of whether the Chinese economy has "hit bottom," NDRC Chairman Zhang said dealing with the global crisis was the greatest challenge of this century for China. The primary objective is to ensure steady and relatively fast (i.e., eight percent) GDP growth by boosting domestic demand, reinvigorating industries, improving social welfare and security to ease concerns and increase public confidence, and mobilizing international support. The central government had identified the problems early and responded swiftly, while some other (unnamed) countries had been slow and late. Zhang said some economic indicators are beginning to show signs of recovery, and China's long-term strong economic fundamentals remain unchanged. Budget: From the People, For the People BEIJING 00000589 002 OF 004 -------------- ¶4. (U) Asked by a Chinese reporter what measures his ministry was taking to improve people's livelihood, MOF Minister Xie observed that public finance is taken from the people, so it should be used in their interests. He said 2009 central government spending in various public welfare categories would total RMB 728.5 billion (USD 106 billion),an increase of RMB 165.3 billion (29.4 percent) compared to 2008. Spending for education, health and medical care, social security, employment, housing, and culture all would register double-digit increases, much of it directed to lower income people, retirees, and rural residents. Proactive Fiscal Policy -------------- ¶5. (U) In response to a query from the Xinhua News Service about the government's "proactive" fiscal policy, Minister Xie said this policy -- applied in conjunction with moderate easing of monetary policy -- includes increased government spending in selected areas, tax reform and reductions to encourage consumption, income support for low-income people, improvements in the social safety net, and commitment of more resources to science and technology, energy conservation, and environmental improvement. By reducing tax revenue and raising spending, these measures will increase the fiscal deficit to RMB 950 billion (about three percent of GDP), requiring the government to issue more bonds, which Xie said was a necessary and affordable step. Fiscal Stimulus: Is There Enough Money? -------------- ¶6. (U) Asked by a Russian journalist whether the government would have any difficulty raising enough funds for the stimulus projects, and whether provincial leaders were lobbying or competing for funding, Chairman Zhang distinguished between the RMB 1.18 trillion provided by the central government and the roughly RMB three trillion from local and non-government sources. Projects that are primarily for public benefit, such as schools, health care, and water, will be funded mainly by the central government, while semi-public-benefit and primarily commercial-benefit projects will need to attract more non-governmental funding. Central authorities will support and assist local governments through issuance of RMB 200 billion of treasury bonds on their behalf, and by providing some low-interest, policy-based loans. Also, implementing agencies for some projects that will generate profits in the long term, such as power plants and roads, will be permitted to issue corporate bonds to meet short-term capital needs; about 45 such bonds worth RMB 170 billion have been issued since the fourth quarter of last year, with another 50 bonds valued at RMB 150 billion pending. ¶7. (U) Asked how the government selected projects for inclusion in the fiscal stimulus program, and what measures would be taken to prevent waste and avoid duplication, NDRC Chairman Zhang said increasing investment was the most effective and direct means to boost domestic demand. The central government, however, clearly has focused the program on investments to improve people's livelihood, such as education, housing, health, agriculture, infrastructure, energy conservation, and pollution reduction, and not on expansion of manufacturing industries already suffering from excess capacity. Approximately three trillion RMB will be used in these sectors, with the remaining one trillion devoted to post-disaster reconstruction. Zhang said the government will continue to adjust the program and transfer funds between sectors as needed. Also, some parts of the separate "ten industrial sector revitalization plans" may be incorporated into the four trillion stimulus package. ¶8. (U) To avoid duplication, inefficiency, and waste, Zhang said the government has formulated a "one clear and two stricts" policy: clearly define the responsible agency for each project, then strictly implement and strictly monitor and inspect the investments. To do so, the government has established 24 central inspection groups to avoid any misuse of funds; thus far, he said no "major violations" of law have been detected. Will there Be Another Stimulus? -------------- ¶9. (U) In response to a foreign journalist's question, Chairman Zhang said the RMB four trillion fiscal stimulus package was a dynamic process. Officials need to monitor the BEIJING 00000589 003 OF 004 economic situation closely to adjust their policies if needed to prevent a slump in growth. As to whether four trillion was enough, he said it is too soon to tell. Monetary Policy: Front-loaded and Forceful -------------- ¶10. (U) A "Financial Times" reporter asked Governor Zhou to comment on the course of China's monetary policy over the past year, from tight in the first half of 2008, to "moderately easy" in the second half, and then to the record release of new credit (RMB 1.6 trillion) in January 2009. Zhou defended the policy changes, taken in response to rapid changes in the economic environment, and said the current mix of monetary and fiscal policy measures was working and starting to bring good effects and upward trends in the data, with some January 2009 data "above expectations." Zhou said the State Council early on had determined that China's policy responses to the global financial crisis should be front-loaded and forceful; if public confidence collapsed, it would be too late to act. He said China had learned this lesson by studying the experience of other countries. "Targets" are Just "Guidelines" -------------- ¶11. (U) Noting that new lending through February already equaled half of the announced RMB five trillion target for the entire year, a Reuters reporter questioned whether this would lead to credit shortages later in 2009. In response, Governor Zhou said the PBOC's target was lending above RMB five trillion. After many years of economic reform, the various money supply "targets" no longer are truly "planned" or compulsory; rather, they are simply guidelines or intermediate goals. The "final" goals for the PBOC are prevention of inflation, promotion of economic growth, generation of employment, and balance of payments stability. Officials needed to assess monetary policy in light of these goals. Furthermore, under the impact of the global crisis, the government needs to remain flexible and not blindly apply simplistic targets. Finally, he acknowledged that Chinese banks tend to extend more loans in the first half of each year, but that does not mean there will be no loans in the second half. SMEs Need Help -------------- ¶12. (U) A China Radio International correspondent asked Governor Zhou how the PBOC would assist China's small and medium enterprises (SMEs),and also about the problem of counterfeit Chinese currency. Zhou said he was aware that many SMEs have complained about credit difficulties, and the PBOC had adjusted its policies in the second half of 2008 accordingly. As a result, in 2008 lending to SMEs rose 13.5 percent, and they received 51.9 percent of total lending, compared to 48 percent for large companies. That said, however, some problems remain, especially for the smaller enterprises with low capital levels. Zhou said all banks need to find ways to assist these companies. For the counterfeit currency issue, Zhou referred the reporter to a recent speech by Vice Governor Ma Delun, now posted on the PBOC website. Exchange Rate: Rule Out Depreciation? -------------- ¶13. (U) Asked by a foreign journalist whether he could clearly rule out a depreciation of the RMB, Governor Zhou replied that Premier Wen Jiabao clearly stated the previous day that the RMB exchange rate should be a market-based, managed floating rate, with reference to a basket of currencies. The government's goal is to maintain a stable and balanced equilibrium, and "no further explanation is necessary." Zhou then added that the global financial crisis was affecting policies in all sectors, and said "we must wonder what will happen in the country where the crisis started." If you can tell me, he told the journalist, then "we can act preemptively." Hong Kong: Currency Swap and RMB Settlement -------------- ¶14. (U) A Hong Kong journalist asked about expansion of Hong Kong's pilot RMB settlement program and implementation of the Hong Kong-Mainland currency swap arrangement. Governor Zhou replied that the settlement pilot program had begun in 2003 and was gradually being expanded. For trade in goods, Zhou said there were "not many difficulties," as banks simply needed to add one more currency to their existing multiple BEIJING 00000589 004 OF 004 currency systems. Regarding the currency swap arrangement with the Hong Kong Monetary Authority, Zhou said announcement of the plan was intended to increase public confidence on both sides of the border and support recovery from the global financial crisis. It also would be used to deal with any sudden liquidity problems. Cross-Strait Banking -------------- ¶15. (U) A Taiwan journalist, noting recent improvements in cross-Strait relations, inquired whether specific reciprocal measures would be taken to further open the banking sectors in both Taiwan and the Mainland. Governor Zhou agreed that more improvements in access for banks from both sides were needed to facilitate deepening economic and financial cooperation. He cited the development of financial relations with Hong Kong as a model; initially little cooperation, followed by gradual expansion to satisfy the demands of the market. PICCUTA